China May Intensify Inflation Fight as Prices Surge

People's Bank of China governor Zhou Xiaochuan said in Washington on Oct. 10. It may take two years for the inflation rate to fall below 3 percent, from a 22-month high of 3.5 percent in August. Photographer: Joshua Roberts/Bloomberg

Dec. 12 (Bloomberg) -- China’s economic data for November
showed growth is withstanding government curbs and extra
measures may be needed to tame the highest inflation rate in
more than two years.

Industrial-output gains accelerated to 13.3 percent last
month from a year earlier, exceeding economists’ median estimate,
a statistics bureau report showed in Beijing yesterday. Consumer
prices rose a more-than-forecast 5.1 percent, the most since
July 2008.

The world’s fastest-growing major economy is maintaining
momentum after an interest-rate increase in October, curbs on
energy consumption and a crackdown on real-estate speculation.
So far, officials have held off on the rate increase predicted
for this weekend by firms including UBS AG. Instead, the central
bank boosted lenders’ reserve requirements on Dec. 10.

“With both inflation and growth figures surprising on the
upside, Beijing can and will focus on fighting inflation whole-heartedly,” said Qu Hongbin, an economist at HSBC Holdings Plc
in Hong Kong. An “immediate” increase in rates is likely and
lenders’ reserve ratios may keep climbing, Qu said.

China’s leaders pledged tonight to give a greater priority
to stabilizing prices in 2011 and better manage liquidity, in
comments reported by the Xinhua News Agency after an annual
conference in Beijing to set economic policy guidelines.

Curbing Investment

The government will also seek to prevent officials
“blindly” starting investment projects as the government’s
next five-year plan takes effect, Xinhua said.

London-based Capital Economics Ltd. said Dec. 10 that a
rate increase after the economic policy meeting “cannot be
ruled out.” The Politburo has already announced that the nation
will officially switch next year to a tighter, “prudent”
monetary stance.

Besides industrial output, urban fixed-asset investment
also grew at a faster pace, climbing 24.9 percent in the first
11 months of 2010 from a year earlier, the report showed. Retail
sales gained 18.7 percent in November from a year earlier.

Bank of America-Merrill Lynch economist Lu Ting said that
industrial-production growth may settle at about a 13 percent
annual rate, satisfying policy makers and leaving “more room to
fight against CPI inflation and asset bubbles.”

Inflation Target

Inflation for the first 11 months was 3.2 percent, more
than the government’s full-year target of 3 percent. Producer
prices climbed 6.1 percent in November, more than any of 28
economists surveyed by Bloomberg News had estimated.

China, which overtook Japan as the world’s second-largest
economy in the second and third quarters, lags behind Asian
countries including Malaysia and South Korea in boosting
borrowing costs.

November’s consumer prices rose by more than the 4.7
percent median forecast of analysts. In October, inflation was
4.4 percent. Yesterday’s data leaked ahead of the announcement,
with the Economic Information Daily reporting the inflation
number on Dec. 10.

“Inflation is shaping up to be the primary challenge
facing policy makers in coming months, and it makes sense for
them to bring out the big guns,” Brian Jackson, a Hong Kong-based analyst at Royal Bank of Canada, said before yesterday’s
data. Tools may include a faster pace of yuan appreciation, as
well as higher rates by year-end, he said.

Food Costs

Food prices rose 11.7 percent in November from a year
earlier, the most in more than two years, and residence-related
costs such as charges for water, electricity and rent were also
a key driver of inflation, the statistics bureau said. Overall
consumer prices rose 1.1 percent from the previous month.

The jump in producer prices topped analysts’ median
forecast of a 5.1 percent increase. Costs of manufacturers’ raw-materials such as cement, steel, fuel and cotton have surged, a
survey of purchasing managers indicated Dec. 1.

The benchmark one-year deposit rate stands at 2.5 percent,
less than the annual pace of inflation, and the lending rate is
5.56 percent. The Shanghai Composite Index of stocks has fallen
10 percent from a Nov. 8 high, extending this year’s loss to 13
percent, on concern tighter monetary policy will cut economic
growth and profits.

On Dec. 10, the central bank announced a 50 basis point
increase in reserve ratios, effective Dec. 20. A basis point is
0.01 percentage point. That move may lock up about 350 billion
yuan ($53 billion), according to Barclays Capital Asia Ltd.

Price Controls

Besides monetary policy, Wen is using administrative tools,
such as sales of state food reserves, to cool prices.

Signs of inflationary pressure have included McDonald’s
Corp., the world’s biggest restaurant chain, pushing up prices,
citing rising costs. The southwestern city of Kunming has
imposed temporary price ceilings on “daily necessities,”
telling retailers such as Wal-Mart Stores Inc. and Carrefour SA
to report any planned price rises.

Cash flowing into the economy from trade, foreign direct
investment and bets on gains by the yuan has added to a domestic
credit boom in exacerbating inflation risks. The trade surplus
was $22.9 billion in November and, in addition, banks extended a
more-than-estimated 564 billion yuan of local-currency loans.

Broad money supply, or M2, rose last month by 19.5 percent,
the fastest gain in six months, the People’s Bank of China
reported Dec. 10. M2 has surged 55 percent over the past two
years and outstanding yuan-denominated loans have climbed to
47.4 trillion yuan, 60 percent more than in November 2008.

Officials are seeking slower credit growth and economists,
including at Societe General SA, expect the government to set a
lower loan ceiling for 2011 than this year’s target of 7.5
trillion yuan.

Inflation may have peaked in November and will probably
soften this month as “price intervention” takes effect and the
impact of earlier price increases washes out of year-on-year
comparisons, Wang Qing, a Hong Kong-based economist at Morgan
Stanley, said in Dec. 6 note.